People make predictions for many different reasons, but the one thing they always have in common is that they tend towards the extreme. Futurologists are either convinced that the world is about to come to an end, or that we’re just on the edge of a new utopia. Of course the truth is more often than not somewhere in-between. However, ‘inbetween’ doesn’t sell newspapers or books. Therefore it’s in the interest of authors to spin issues in a particular direction. After all, no one ever bought a book called ‘Things are basically ok’.
Prosperity by Bob Davis and David Wessel was written in 1998 and takes the optimistic path, predicting a twenty year economic boom. This is based on the alarmingly common idea (see my review of The Long Boom), that the strong economic growth experienced during the Clinton years would last at least for another generation or so. This is despite the fact that a century of economic study points towards bust almost always following boom and that booms rarely last that long.
What makes this prediction even more surprising is that Dob Davis and David Wessel are both experienced Wall Street journalists. They had access to all the data and should have realised that America was just at the end of one boom, ‘the internet tech-bubble’. Equally, debt was already growing at an unhealthy rate that would lead to the biggest market crash since the Great Depression.
Bob Davis and David Wessel weren’t alone in missing it though. Virtually the entire financial media failed to spot the coming apocalypse, and the few that did were openly mocked. For anyone interested in this kind of thing, I’d highly recommend Carmen Reinhart and Kenneth Rogoff’s book This Time Is Different: Eight Centuries of Financial Folly. In it they point out that in most cases almost anyone could spot a financial crisis coming as the evidence is often obvious.
If this is the case though, why do the media and politicians seem to repeatedly ignore the warning signs? I suppose it’s partly because no one wants to be the person who bursts the bubble. It’s the equivalent of pointing out that the Emperor is actually naked. It could also be blamed on hubris and the fact that people like to agree with the people around them (a bit like sheep).
David Wessel has a new book out where he looks at the role of the Federal Reserve in handling the Credit Crunch of 2008. On the books website Prosperity is listed amongst his publications, but claims that it’s a book about the middle classes which I think is being slightly disingenuous. What’s slightly more worrying is some of the reviews of Prosperity I found online. Take this one for example, that praises the authors predictions of continued economic growth, “The economy, like a massive ocean liner that can’t sink, is moving in the proper direction, and Greenspan will not change its course, even though he has the power to do so”. “Massive ocean liner that can’t sink”? Have these people never heard of the Titanic?
Will economists, academics, politicians and the media ever learn from their mistakes? Probably not. After all surely next time it will be different…